Tesla Inc. is planning a factory in China with a capacity for 500 000 vehicles a year, its biggest step beyond the US so far, according to people familiar with the matter.

Tesla is due to sign a memorandum of understanding with local entities in Shanghai, the people said, asking not to be identified as the information isn’t public. Chief Executive Officer Elon Musk was to be in the city for an event with the government on Tuesday, Bloomberg reported earlier. A Tesla representative in China didn’t immediately respond to a request for comment.

While Tesla has been working on setting up production in China for more than a year, President Donald Trump has been trying to bolster manufacturing in the US Tesla follows Harley-Davidson Inc. in expanding outside the US, underscoring the urgency with which companies are moving to avoid damage from escalating trade disputes.

The automaker’s shares extended their advance in pre-market trading to 2.7% on the news.

The youngest publicly held US automaker is looking to expand its capacity and to more efficiently reach global markets. Tesla’s lone car-assembly plant is in Fremont, California, with a giant battery factory in neighbouring Nevada. After moving ahead in China, the world’s largest market for electric vehicles, Tesla has said it will reveal plans toward the end of 2018 to build a plant in Europe.

Tesla said a year ago it was working with the Shanghai government to explore local manufacturing. Since then, production in China has become even more compelling: Last week, in response to tariffs imposed by the US, China increased the import duty on US-made cars to 40%, compared with 25% last year, prompting Tesla to raise prices. A plant in China also reduces shipping costs and potentially makes sourcing components more economical.

The company has boosted of Model S sedans and Model X crossovers in China by as much as $30 000 after Beijing imposed additional duties on American-built autos, putting its vehicles beyond the reach of more consumers in its No. 2 market globally.

In November, Musk said Tesla is about three years away from starting production in the world’s largest auto market. The plant will make a couple hundred thousand vehicles a year for buyers in China and potentially other parts of Asia, he said at the time. Tesla probably will make the smaller Model 3 sedan and upcoming Model Y crossover in China, he said then, rather than the pricier Model S sedan or Model X sport utility vehicles, which often sell for more than $100 000 in the US.

China presents a massive growth opportunity for Tesla and rivals such as BMW AG and Daimler AG, which are seeking to take advantage of the fast-growing market. Sales of new-energy vehicles — a category that includes battery-powered, plug-in hybrid and fuel-cell automobiles — reached 777 000 units last year and could surpass 1 million this year, according to estimates by the China Association of Automobile Manufacturers. The government’s target is 7 million vehicles a year by 2025.

Tesla sold 14 779 vehicles in China last year, according to data from LMC Automotive. That gave it about 3% of the nation’s battery-powered electric-vehicle market, placing it as the No. 10 brand in that segment. China accounted for 17% of Tesla’s revenue for 2017, according a filing with US regulators.

Ramping up manufacturing is critical to the carmaker being able to sustain itself financially while pursuing Musk’s mission to transition the world to battery-powered transportation. Tesla produced 5 031 Model 3s in the last week of the second quarter in its Fremont plant, meeting a target that Musk had said was crucial to generating cash and earning profit.

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